GE to raise over $5.4 billion through Japan sale

Posted by: Ian Rowley on July 11, 2008

More signs of life in Japan’s banking sector. A few weeks ago I wrote a story about Japan’s biggest banks, emboldened by relative low subprime losses, are shopping around. Today, though, Shinsei Bank, a relative minnow compared to Japan’s three mega banks, is about to pull off $5.4 billion deal to buy GE’s Japan consumer finance business., Shinsei, which is headed by former Morgan Stanley banker Thierry Porte, is set to pay $5.4 billion for the Japanese arm of GE Consumer Finance. In the era of the credit crunch, that’s a pretty chunky transaction.

That GE is looking to sell off assets isn’t a big surprise. This year it has already agreed to sell its corporate charge card unit to American Express. Last year and sold U.S. subprime unit WMC Mortgage. And in May GE said it might sell its Australian home mortgage unit Wizard. Still, the size of the deal with Shinsei goes beyond what many expected. Reuters reports that GE had previously said it would like to sell Lake, its unsecured lending division, but had said nothing about exiting the rest of its Japanese consumer finance business, which also includes a credit card and housing loan operation. That’s one reason why the price is far higher than analysts expected.

Why would GE want out of Japan’s consumer finance biz? Well, apart from its desire to raise funds by selling assets around the globe, consumer finance companies in Japan have had a tough time of late. What’s more, it’s nothing to do with the credit crunch but the Japanese government’s moves, in December 2006, to clamp down on lending practices.

The impact cannot be underestimated. The four biggest consumer finance lenders (GE Consumer Finance ranks sixth) lost a combined $16 billion in the fiscal year ending in March. Worse, consumer finance companies are still hurting as customers demand the return of excessive interest rates paid in the past.

All of which begs the question what’s in it for Shinsei? After all, the more stringent regulation has also hurt its bottom line. Shinsei posted a loss for the year through March 2008 due to the performance of its existing consumer subsidiaries Shinki and Aplus.

One theory is that by increasing scale sufficiently Shinsei hopes to make consumer finance pay in Japan even in the tough regulatory environment. Still, the move may attract some criticism. Shinsei was formed from the ashes of the failed Long Term Credit Bank, which collapsed in the later 1990s. Ripplewood, the New York based private equity outfit, then made a small fortune when the bank listed in 2004. But as Japan’s Nikkei newspaper, points out, as part of the deal Shinsei received around $2 billion of public fund injections in exchange for issuing stock to the government. So far it hasn’t been able to pay it back, while its stock price is below the level at which the government could sell the stock and make its money back. Spending big on GE’s consumer finance arm, the paper concludes, may be a risky move.

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